Debt-for-equity swap provision being looked into – RBI

Newsroom24x7 Desk

rbi2New Delhi : The Reserve Bank of India (RBI) is taking cognizance of its SDR (Strategic Debt Restructuring) scheme launched in the first half of this financial year and is still hopeful of a good success ratio on its implementation. RBI’s Deputy Governor S.S. Mundra informed today that RBI is looking into a provision it introduced in June to help lenders managed stressed assets. Arguing in its support, he added that it was too soon to write off the debt-for-equity swap tool as a failure. ‘It is a work in progress. You will hear…more from us on this soon,’ he added, saying, ‘We are looking into it.’

Strategic Debt Restructuring (SDR) aims to allow banks to take majority ownership of troubled firms and look for new owners. It allows banks to classify the debt in question as ‘standard’, rather than bad, during the 18 month process. To date, SDR has been invoked in 9 cases but none has yet sold assets or significantly reduced debt.

In June 2015, the Reserve Bank of India (RBI) had come out with the stringent strategic debt restructuring (SDR) scheme incorporating features like majority (51 per cent) stake for banks in stressed companies, faster conversion of debt into equity and bringing in a new promoter. According to the RBI norms, banks which decide to recast a company’s debt under the proposed strategic debt restructuring scheme must necessarily hold 51 per cent or more of the equity after the debt-for-share conversion.

Additionally, at the time of initial restructuring, the joint lenders forum (JLF) would have to incorporate an option to convert the entire loan (including unpaid interest), or part thereof, into shares in the company in the event the borrower is not able to achieve the viability milestones. And, they must adhere to ‘critical conditions’ as stipulated in the restructuring package.

Last month end, Gammon India’s lenders started the process of swapping their debt into equity under the strategic debt restructuring (SDR) scheme.Earlier, this engineering firm Gammon India, being pulled down under heavy debt, had announced a major loan restructuring exercise in 2013 under which it would convert debt of over Rs 14,800 crore into equity. against this, lenders would be issued fresh shares worth more than Rs 4,500 crore. Gammon’s CDR package was approved in June 2013. Its board then approved conversion of restructured debt — worth Rs 14,814.17 crore — into equity shares. The company then decided to issue over 34 crore shares, at a price of Rs 27.05 apiece, aggregating to Rs 929.99 crore to the lenders on preferential basis. This issue would be towards conversion of fund-based facilities — working capital term loan and funded interest term loan — at any time during the CDR package implementation.

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